Sunday, March 29, 2015

Why POT and VZ are not Dividend Machines

I
am not enamored with the market and I cannot put my finger on it.Alfred Ferol tells me it is time for a
pause.Lots of things are influencing
the market including people’s moods.You
don’t have to invest every day, he points out.

Are
we scared of a 25 basis point increase in rates?Maybe it is the unrest in the Middle East that
is to blame for the malaise and the fear.Or perhaps the strong dollar with its negative impact on earnings has the
market feeling gloomy.

In
that frame of mind, I looked at ten stocks that I might consider as a 2015
Dividend Machine stock.Several calls
were taken last week and I have money to invest.I looked at these ten stocks not just as
potential Dividend Machines but also as possible investments that might not
quite make the Dividend Machine grade but are worthy of investment.I decided to profile two stocks with the view
of “why I don’t want to invest in either one.”

Dividend
Machine Fundamentals of VZ and POT

Of
these ten stocks, the two stocks that even come close enough to consider my
investment are Potash symbol POT and Verizon symbol VZ.

Both
of these stocks make more money in EPS than they pay out in dividends and their
yields are around 4.5%. Let’s look at
these stocks further.

Verizon
has a solid 5 year dividend history.They have increased the dividend an average of 3.16% per year.This is not quite enough to make VZ a
Dividend Machine as we require at least a 4% average increase per year over the
past five years.

Potash
has a really robust dividend increase history.If you look at the past three years, the dividend has increased from
$.14 to $.38 per quarter.That is an
average annual increase of 56%.But,
POT has a history of cutting the dividend.They clearly have tried to maintain a payout during difficult times but
they will reduce the dividend if needed to maintain the integrity of their
balance sheet.

POT
has a D/E ratio of only .37.VZ has a
D/E ratio of 8.99.

The
Tables below show the Dividend Machine fundamentals of these two stocks.

My
Take:

I
value balance sheet integrity a great deal and feel that I would rather pick a
stock with a D/E ratio of less than one rather a stock with a D/E as high as VZ’s.However, I am worried about these value
stocks like POT that deliver a nice dividend now but if things get worse, they
may not deliver the same income as I expect.

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Covered Call Opportunities

Square, symbol SQ, is my current favorite stock that is not a dividend machine. To turn it into an income investment, I use SQ's volatiity to buy when it dips and sell calls. See the table above. Note that this call is not included in the post published on 12/12/18 M*

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TheMoneyMadam's Story

My income investing success came from my experience managing my and other people's money since 1993. Successful income investing requires discipline. In this blog I provide specific investments based on my principles of conservative income investing. I hope to help the thousands or even millions of people who have saved and want to invest their nest eggs to retire with income that grows. M* MoneyMadam

Disclaimer

Information on this blog does not constitute investment advice. Review or mention of any stock, bond, or other investment shall not be considered a buy or sell recommendation. Everything in this blog is the opinion of the author and no warranties are expressed or implied. M*MoneyMadam.